U.S. Offshore Outsourcing Leads to Structural Changes and Big Impact

cio.com ^ | August 13, 2003 | Diane Morello

[thimios]

U.S. Offshore Outsourcing Leads to Structural Changes and Big Impact Gartner

By Diane Morello Vice President & Research Director

As offshore outsourcing ramps up, the dislocation of IT jobs in the United States is becoming real. CIOs must anticipate the potential loss of talent, knowledge and performance.

Many Ramifications With an Outsourcing Decision

In the first half of 2003, the application development manager of a well-known company was frantic. Her staff was near mutiny. A day earlier, the CIO had called an "all hands" meeting and announced that he could save the company $30 million during the next few years. How did he propose to do that? By moving application development offshore to outsourcing vendors. The application developers in the room were stunned. Immediately, they crowded into the office of their manager, all asking similar questions: What does this mean for me? Is my job safe? Will I become unemployed?

That scene is occurring in company after company around the United States, from midsize to large companies, with each decision affecting between 150 and 1,000 people. The movement of IT-related work from the United States and other developed countries to vendors and offshore sites in emerging markets is an irreversible mega trend. Although the United States may feel the biggest effect from this movement, other developed economies, including Australia and the United Kingdom, feel disoriented, too.

The workforce changes that accompany the trend toward offshore delivery - whether offshore outsourcing or offshore insourcing - are structural in nature, not fleeting or temporal. The effect of IT offshore outsourcing on the United States is a harbinger of changes in other countries that pursue global sourcing models. The workforce and labor-market consequences will be substantial.

Three CIO Issues

Three overarching issues shape CIOs' obligations around offshore outsourcing:

As long as new investment in IT remains low in North America and Western Europe, IT offshore outsourcing will yield a displacement of IT professionals and IT-related jobs. CIOs who make ill-informed decisions today will be unable to find or acquire the requisite local knowledge and competencies when IT investment resumes.

Few enterprises would deliberately choose to cede intellectual assets to offshore outsourcing vendors, but some executives fail to envision today which skills, knowledge or processes will generate business innovation tomorrow. Vision, leadership and an understanding of how technology fuels competitive advantage will help CIOs and business counterparts retain core knowledge.

CIOs and other business leaders must be clear about their plans, timing and transition phases for the offshore outsourcing transition. They must develop milestones, timelines and accountability. Moreover, they must communicate honestly and respectfully to keep performance high and defuse employee anger.

Not a Pretty Picture for the IT Workforce

Since 2001, according to the U.S. Bureau of Labor Statistics, more than 500,000 people in IT professions in the United States have lost their jobs. Some were caught in the dot-com bust. Others were laid off by cost cuts, shrinking budgets, a poor economy and a desire to satisfy shareholders quarter by quarter. Now, a growing number of IT professionals and practitioners are having their jobs displaced as IT work moves to offshore venues.

Without a "shot of adrenaline" to the U.S. IT profession - such as an investment boom, a "white knight" industry, new IT-led innovation or new ways of competing globally - the scenario for the IT workforce in the United States and other developed nations looks bleak.

Large U.S. enterprises, vendors and service providers aggressively are investigating or pursuing offshore markets for IT delivery. Combining that interest with minimal new investment, preliminary Gartner analysis - based on the IT Association of America's count of 10.3 million IT practitioners in the United States in 2003 - indicates that another 500,000 IT jobs plausibly may disappear by year-end 2004.

By year-end 2004, one out of every 10 jobs within U.S.-based IT vendors and IT service providers will move to emerging markets, as will one out of every 20 IT jobs within user enterprises (0.8 probability).

Through 2005, fewer than 40 percent of people whose jobs are moved to emerging markets will be re-deployed by their current employers (0.8 probability).

Likely Implications of IT Offshoring

To many CIOs and business executives, the decision to outsource activities offshore is fiscally sound:

The cost, quality, value and process advantages are well proven.

Moreover, at a time when IS organizations are struggling with poor credibility and IT is being scrutinized, offshore outsourcing is becoming a tool for improving service delivery and a source of highly qualified talent in greater numbers.

Finally, the extensive use of quality methodologies among offshore vendors - such as Software Capability Maturity Model (CMM), People CMM and ISO 9000 - enables a degree of assurance that many in-house organizations lack.

Gartner urges CIOs and other business executives not to trivialize the impact of offshore outsourcing on their business strategies, their organizations or their employees. Three areas of concern arise:

Loss of future talent;

Loss of intellectual assets;

Loss of organizational performance.

Loss of Future Talent

Many IT applications and services that are being considered for movement offshore are now run and maintained by seasoned IT professionals in user companies, technology vendors and IT service providers. Offshore movement of that technical work implies a significant displacement of IT professionals who possess organizational memory around IT investments. At the same time, college students in the United States, the United Kingdom and other developed countries see technical work moving to emerging markets, and see family and friends losing technical jobs. Interest in pursuing technical careers will wane.

Why should CIOs care? Because they cannot afford to have domestic IT talent "dry up." When investment resumes and the economy rebounds, CIOs will need a cadre of seasoned IT professionals and eager recruits to "turbocharge" new ideas, new investments and new programs.

Loss of Intellectual Assets

CIOs and enterprise executives must ask: If everything can theoretically be outsourced, what kind of knowledge must we retain or develop? At Gartner's Outsourcing Summit in Los Angeles in June 2003, 39 percent of attendees at the session "Managing Workforce-Related Risk in Outsourcing" cited the loss of critical knowledge as the greatest source of workforce-related risk around outsourcing. Identifying, capturing and measuring core enterprise knowledge is daunting, especially when critical knowledge is often subordinate to technical skill sets.

For now, most enterprises send straightforward technical activities and routine business processes offshore, but the ease with which they can move those activities may numb decision-makers to the need to maintain and protect essential knowledge/

Six areas of core knowledge that are worth protecting include:

Enterprise Knowledge: How do our products, services and systems blend together?

Cultural Knowledge: How do we do things here? What are our beliefs? Who really makes decisions?

Social Network Knowledge: Which roles and which people form critical connective tissue?

Strategic Knowledge: What are our objectives and competitive advantages?

Industry and Process Knowledge: How do our industry, competitors, and customers operate?

Activity Knowledge: Do we know which people are doing what today?

Loss of Organizational Performance

Offshore outsourcing weakens the already-fragile relationships between employees and employers. Whether CIOs are considering, investigating or actively pursuing offshore outsourcing, they should prepare for a bumpy ride. Beneath the sound business reasons for outsourcing lie thornier issues associated with people.

Decisions to outsource - whether offshore or domestic - bring upheaval to IS organizational competencies, roles and makeup. More than 40 percent of attendees at the workforce-related risk presentation at Gartner's Outsourcing Summit considered their organizations to be ill-prepared for the new roles, competencies and skills that accompany an outsourcing delivery model.

Are Enterprises Prepared for Outsourcing? Not Really

The situation worsens with offshore outsourcing, because fewer than 40 percent of the people affected will be re-deployed. During the offshore transition, the degree of uncertainty is so high that it can severely disrupt organizational performance. CIOs and other business executives should hold themselves accountable for sustaining and improving organizational performance levels during the transition. To do so, they should coordinate along several lines:

Identify competencies, roles, people and knowledge that will be retained. To prevent organizational paralysis, CIOs must define the future role and shape of their IS organizations as certain day-to-day activities move overseas. Gartner research reveals that many enterprises retain such critical functions as application design, application integration, client-facing process management, enterprise architecture, information management and high-investment competency centers. In addition, they develop new competencies in service management, vendor relationship management, process management and business integration.

Create a meaningful transition plan. Provide clear timelines and milestones to help people prepare for the changes that offshore outsourcing brings (for example, Milestone A will be reached in six months, Milestone B six months later and Milestone C 12 months after that). At each milestone, certain segments of work or applications will complete their offshore transfer, and the affected people will be terminated or re-deployed. Companies that have a lasting commitment to their people will generally spend time arranging redeployment of their affected employees.

Outline employees' options. Define the options available for affected employees: re-skilling, re-deployment, termination or outplacement. The way in which enterprises deal with employees during the offshore transition will be a lasting testament to the perception of leadership and the reputation of the company as an employer. Executives must hold themselves accountable for communicating clearly, quickly and meaningfully. "I don't know" is an unacceptable answer when the organization's performance and people's livelihood are at stake.

Bottom Line

CIOs and business leaders in the United States and other developed countries should move carefully as they pursue offshore outsourcing.

Until IT investment resumes, IT offshore outsourcing will yield a displacement of IT professionals and IT-related jobs.

CIOs who make ill-informed decisions will be unable to find or develop qualified talent when they need it.

Additionally, CIOs and other business leaders must be clear about envisioning what knowledge, roles, people and skills will fuel competitive advantage in the future - otherwise, they risk losing core knowledge.

Finally, CIOs must communicate clearly, honestly and respectfully about the transition plan, and about the options available to affected employees.

[GatekeeperBookman]

Only Hillary can save W. She will. Tha, & only that, will compell us to vote.

[Lazamataz]

You say a lot of evil things about our President. I think you need to be held accountable for running your mouth and making these insulting, outragous claims. Like President Bush said, you're either with us or against us. I can only presume you're an enemy of this nation.

F**king disgusting. Yeah, you. You are utterly disgusting. To claim that criticism of the President makes one an enemy of this nation??? No, YOU are an enemy of this nation, because YOU oppose free speech.

I will criticise the President any time I desire, especially when he is wrong. And if you don't like it, observe the double bird.

And quit pinging Howlin and her friends. Or can't you fight your own battles, you disgusting wussy?

[scottlang]

Just one more article that will be another nail in GWB’s coffin in 2004. As a hardcore conservative and IT professional, I’m not too happy and somewhat reluctant to pull the level for GWB, and I’m not alone.


I am reluctantly agreeing with you.

[Nataku X]

The problem with electing a Democrat is that these same Democrats look to punish businesses, raise taxes, and so on. It's one thing to be a populist. It's another thing to be vehemently anti-business. Look at the double-digit unemployment in Canada, France, Germany.

Someone needs to enact reasonable protectionist measures such as abolishing H1-B & L1, shrink the government, remove some EPA regulations, tariff all goods made with foreign hands at a flat rate, and then provide tax incentives to keep workers in America.

Subsidies also need to be stopped, period--whether it's corporate welfare or farm payoffs. I'll also bet that CA wouldn't have anywhere near its 38B deficit if it actually deported illegal immigrants.

It seems that none of the candidates, either Democratic or Bush, are willing to enact a form of "compassionaite capitalism". It's either communism (Democrats) or socialism-with-big-business (Bush). If we are only faced with alternatives that will make the current situation much worse than it is today, then I suggest that we do a write-in for Ross Perot--it won't get him elected, but if enough people do it, it will send a powerful message about the kind of populist we want without socialism.

[harpseal]

Dean loving Luddite.

It is against the rules of this website to initiate flame wars. If you can not discuss issues then go back to DU with teh rest of the PRC loving Marxists.

[harpseal]

And why doesn't The Government prohibit automatic door openers, that could employ at least four FTE's per door. Same for automatic elevator operators. More police would be on the streets if we did away with cold-impartial-inflexible traffic lights and these were replaced by caring traffic cops. An internal passport (useful for catching terrorists) could be introduced to employ printers and even more police who could man the roadblocks at each town gate. Other opportunities to create employment exist in highway building. There are machines (some made in Korea, some in Japan) that are taking away the jobs of thousands of American shovelers. Dial telephones cause the RIFing of thousands of smooth operators, the belles of Southern Bell.

It is nnot in the American interest to reduce productivity it is in the American interest to have people employed in productive jobs. There are a number of things that can be done to provide a better envirornment for Capital investment in the USA

[Doohickey]

Comparing entry level non-skilled jobs to jobs that require skill and continuous education is flip. There is no shortage of other entry level jobs that these poor, displaced grocery checkers can get.

There are signs up all over town here for similar work, unlike technology and skilled service jobs.

[Iscool]

Oh BTW, if you owned a business and tried to cut costs of doing business, how would you feel if a government beureaucrat said you couldn't.</>

I'd say if they can't stay in business while protecting our national sovereignty and national security, screw 'em...They don't deserve to be in any type of business...If you want to be a globalist, do it in Indonesia but it will cost you to peddle your "junk" in the U.S. of A...

[Nataku X]

Incidentially, do you know anything about Dick Gephardt's other platforms? He's anti-free-trade, but is there any indication that he's not outright socialist/communist (universal health care, higher taxes, etc.) like Kuninich is?

With Bush's continued policies, we'll be living in a grass hut growing our own food. With Kuninch, we'll be living on the streets next to dilapidated goverment buildings and knifing each other.

[GatekeeperBookman]

Koblenz-Why are these companies so damned selfish? - Men ( & women ) ARE selfish by definition. Also corporations.

These are 'new world' issues being debated in an 'old world' manner-by old rules.
We have a very large hill to climb-moving our decision-makers ( some of whom are corrupt ) from Industrial Age mentality & attachments ( to factions based in the old world ) to a new model of high tech dynamics.

The new model ( & I am assuming that high tech manufacturing & communication mixes with the geo-political dynamic to yield a new model ) is yet to be defined-it appears to be far too dynamic ( evolving ) or newly formed to get more than a mere snap shot. Those who discuss these things also have certain prejudices.

Bad actors ( like China & Russia & their clients in the Third World ) make big trouble. The NWO ( constitutes a major faction which seeks to control all large events ) has great difficulty getting these bad guys to sit still untill their fair share of the world can be determined-or manipulated giving the Western Powers more of the pie... Corruption at the highest level of the NWO also interferes with the PLAN.

We peons in America keep screwing things up by insisting we follow our Constitution-a free & powerful populace was not in the PLAN ( of the NWO ).

The more aggressive geo-political actors will have the potential to employ their adaption of these New World dynamics to their advantage-given that their populations are not free.

[harpseal]

While the consequences of the Smoot-Hawley Tariff have been a subject of dispute, few would deny that it stimulated a cascade of retaliatory tariffs by foreign governments which made it very hard for American businessmen and farmers to sell goods overseas.

Actually a look at the Historical record shows that other nations had started increasing tariffs on American goods prior to the enactment of Smoot Hawley and that US exports were falling as a result before that. You really should study your History. If Smoot Hawley was bad for the American economy then Why was the Fordney-McCumber tariff which raised tariffs to their highest levels in US history not responsible for damage to teh US economy. Whenever some one says few would deny this is obviously merely an attempt to stifle debate of the actual record. Since concurrent with the Smoot-Hawley act there was even more tightening of credit by the Federal Reserve, a cancelation of a proposed reduction in Federal income tax rates, and a severe overseas depression that had been underway for several years this statement is clearly unsupported. I could as well say few can argue the Smoot Hawley tariffs mitigated teh effects of teh Depression which was already underway and it would have as much validity as your assertion. I do not necessarily make this claim and will simply state that the Smoot Hawley tariffs were enacted in June of 1930 after the depression in the USA was already well underway and it did not prevent the continuation of the depression. This can be shown from the historical record and if one actually reads Friedman's thesis on the Smoot Hawley tariffs he does not claim to have proven the deleterious effects because he lacked teh econometric data.

This took the American economy, already staggering after the Stock Market Crash of 1929, and shot it in the knee.

A lie

The Smoot-Hawley Tariff may not have caused the Great Depression but it made it matters much worse.

Evidence or be considered a liar. By the way I reread Freidman again so do not expect that to give you much help. I am really tired of people who have only read a synopsis of Freidman and not read his actual work trying to argue this.

When the Democrats returned to power they slowly began to reduce tariff rates

You got that part right congratulatiosn>

and the Republicans with few exceptions have abandoned protectionism.This says nothing about the wisdom of tariffs

Today, for the most part both political parties assert that government tariffs that either fatten the profits of poorly run businesses or keep alive jobs that do not make economic sense anymore, cheat the vast majority of Americans of the benefits of affordable goods and make it harder for us to sell our products overseas.

An assertion of lies does not make them true. Please present any evidence you have of any of these assertions.

[Those_Crazy_Liberals]

"F**king disgusting. Yeah, you. You are utterly disgusting. To claim that criticism of the President makes one an enemy of this nation??? No, YOU are an enemy of this nation, because YOU oppose free speech."

How does it feel to be in bed with HILLARY? You both seem to express your frustration with our honorable President in the same shrill manner.

[banjo joe]

My favorite line from the piece, and part of the problem...

The cost, quality, value and process advantages are well proven.

These aren't proven at all, but knuckleheads will accept this statement as fact.
My shop is finding that rework on this stuff is VERY heavy, but management sees only payroll "savings". Meanwhile the American development staff is doing heavy OT fixing the crap.

[Those_Crazy_Liberals]

"It is against the rules of this website to initiate flame wars. If you can not discuss issues then go back to DU with teh rest of the PRC loving Marxists."

There's a difference between passion and a flame war. People like you cause a flame war because you can't refute the facts. Try again before you're put out to play in the yard.

[Those_Crazy_Liberals]

"And quit pinging Howlin and her friends."

Does Howlin intimidate you? Where's your manhood?

[Those_Crazy_Liberals]

"You are confused. Luddites were opposing the development of the new industries in their own country. Outsourcing and buildup of national debt is something else."

I completely disagree that the term luddite is inappropriate here. An economic luddite is a luddite non the less. If the wooden shoe fits, wear it.

[Iscool]

Like President Bush said, you're either with us or against us. I can only presume you're an enemy of this nation.

Your problem is what they call tunnel-vision...There's more going on than the war in Iraq...Our fearless leader is sending our jobs overseas for the benefits of his financial doners...He is allowing military technology to move to China...He refuses to unlock the access to natural gas and low sulphur coal deposits which he could do with the stroke of a pen...

Maybe you're warm with a seemingly secure job but more and more AMERICANS are not...

[harpseal]

Here is a what is now a twelve point plan. Modified from my ten point plan that has been out there several months.
1. Get rid of government subsidies for offshore investment of US companies. OPIC is the first such program which should go but support of World Bank programs that subsidize the outflow of Capital would be another.

2. Use tariffs on those nations which are engaged in unfair trade practices such as currency manipulation (China and India for example), those nations which refuse to open their markets to US products (China for example with its 50% tariffs on US consumer goods and non tariff barriers), those nations that subsidize competition to American Industry (airbus for example) and those nations which have slave conditions for their workers.

3. Use tariffs and other means to prevent the relocation of jobs offshore that are essential to the national defense. If necessary take control of the company seeking to export vital technology or industry by means of eminent domain (No I do not like this last option and I will only defend its use as an absolute last resort like say in the case of rare earth magnets essential to smart bomb technology).

4. An immediate end to guest worker programs. If people wish to come to the USA to work and make a life let them immigrate according to the rules.

5 Provide economic development zones where the corporate income tax is zero for operations within these zones. In order to operate in this zone a company must agree to only purchase American components if available and employ only American citizens or legal immigrants in these operations.

6. Scale back unnecessary regulation.

7. Increase the domestic content in purchases by the Department of defense and give absolute preference in non-domestic content to proven allies of the USA over say the French or Germans.

8. Do not allow expense involved in moving operations overseas to be included in business expenses under the IRS code.

9. Prosecute for perjury anyone who has made a false statement in order to employ an H1B or L1 visa worker. I will be lenient on the actual perjurer if he/she was ordered to make this false statement and he/she provides testimony to aid in the conviction of the person ordering the perjury. Just because a person is a CEO does not give them a pass on criminal behavior.

10. Prosecute anyone who orders the transfer of vital defense technology overseas except to strong allies of the USA. The UK and Australia come to mind as meeting these criteria first.

11. Institute a cap on punitive damages, limits on class action suits, and limits on liability to the actual percentage of liability with no plaintiff able to collect if said plaintiff was involved in the commission of a felony at the time of the alleged tort or was more than 49% negligent in the alleged tort.

12. Deport all illegal aliens immediately and take measures that prevent the entry of any more illegal aliens

Every point is conservative and nature and every point helps improve the investment employment climate in the USA.

[GatekeeperBookman]

"F**king disgusting. "

What a contribution. Is the Smoky Backroom a place for this?

[Those_Crazy_Liberals]

"Our fearless leader is sending our jobs overseas for the benefits of his financial doners . . .Maybe you're warm with a seemingly secure job but more and more AMERICANS are not..."

Think about what you just said? How pathetic when I have to constantly deal with the mindset that ANY president sends jobs here or there or even creates jobs. Get over that mentality or you'll be an assembly line rat for the rest of your life, working for crumbs.

P.S. I'm actually self-employed and have all the security my hard work brings me. If you don't have confidence in yourself, who will?